Dead equity is stock that stays with someone who no longer works at the company, usually a cofounder who left early but kept their full share. It happens when there is no vesting schedule and no buy-back clause to claim the shares back, and it blocks new hires and new investors from taking a stake.
What is dead equity?
Dead equity is equity held by someone who is not creating value for the company anymore. Most often that is a cofounder who left the business in year one or two but walked away owning the same percentage they started with, because nothing in the paperwork said otherwise.
The pattern is depressingly simple. A founding team splits shares evenly on day one, nobody writes in a vesting schedule, one person leaves after eight months for a job, a health reason, or a falling out, and the remaining founders spend the next six years building the company while that stake sits untouched. Dead equity is rarely malice. It is usually two or three people who trusted each other and never put the exit terms in writing.
Why do investors treat dead equity as a red flag?
Investors read dead equity as a tax on everyone still working. Every point sitting with someone who left is a point that cannot go to the engineer you need to hire, the option pool an investor expects you to have, or the founders actually running the business.
It also raises a harder question than the math: if the founders could not agree on exit terms once, what else did they skip. A term sheet conversation that turns up a large inactive holder tends to slow down fast, because the new investor has to ask the departed person to sign off on the deal, give something up, or both. The cleanest cap tables are the ones where every name on them is still doing the work.
How do you stop dead equity before it happens?
You stop it with four terms in the founder agreement, signed before anyone needs them. Add these while the relationship is good, because none of them are easy to add once it is not.
- Vesting cliff. Shares vest over time, typically four years, and nobody earns anything until they clear a cliff, typically one year. Leave before the cliff and you keep nothing. Our guide to cofounder vesting schedules covers how to set the length and cliff for your situation.
- Buy-back clause. The company has the right to repurchase a departing founder's unvested, and sometimes vested, shares at a set or fair-market price instead of leaving them outstanding indefinitely.
- Good leaver, bad leaver terms. The agreement defines what a founder keeps if they leave on good terms versus what they forfeit if they leave to compete, get fired for cause, or breach the agreement.
- Clawback clause. A separate right to reclaim already-vested shares in specific situations, such as proven misconduct or a breach of fiduciary duty, not just a disagreement about effort.
Put all four in the same document as roles and decision rights, not a side letter nobody rereads. A free cofounder alignment check is a fast way to see whether you and your cofounder actually agree on what "leaving" should cost, before you write it down.
What do you do if a cofounder already owns dead equity?
You negotiate a buy-back, because you cannot impose vesting after the fact without their agreement. Start by getting the remaining founders and the departed one to name a number and a structure, not just a grievance.
Get a fair valuation, usually tied to your last round or a recent 409A, and offer cash, a note, or a mix if cash is tight. Involve legal counsel on both sides; a buy-back done informally between friends is the exact kind of unwritten deal that caused the problem in the first place. If the former cofounder is still an officer or board member, that needs to be resolved alongside the equity, not after it. Our piece on what happens to equity when a cofounder leaves walks through the sequence in more detail.
Can equity be clawed back after it has vested?
Only if the agreement already gives you that right, and only for the reasons it names. You cannot vote to take back vested shares just because someone left or because the company wishes they had vested less.
A valid clawback clause usually requires a specific trigger, such as a breach of a non-compete, a fraud finding, or a violation of fiduciary duty, and it often runs through a buy-back mechanism rather than a straight cancellation. If your current agreement has no clawback language, you can add one going forward for new grants, but you almost always need the existing holder's consent to apply it retroactively to shares they already earned. That consent is the whole negotiation, and it goes better when there is still some goodwill left to spend.
Frequently asked questions
- What is dead equity in a startup?
- Dead equity is stock or options held by someone who no longer works at the company, most often a cofounder who left early but kept their full stake. It stays on the cap table doing nothing for the business while diluting everyone who is still building it.
- How much dead equity is too much?
- There is no fixed line, but most investors get uneasy once an inactive holder sits above five to ten percent. At that size the stake is big enough to complicate a new hire's offer, an option pool refresh, or a future round, and buyers will ask about it directly.
- Can you remove a cofounder's equity after they leave?
- Only if your founder agreement already allows it, through unvested shares that revert automatically or a buy-back clause the company can exercise. Without those terms in writing, you cannot take equity back. You can only negotiate a sale, which is slower and costs more goodwill.
- Does vesting actually stop dead equity?
- Vesting with a cliff stops most of it. A founder who leaves before the cliff keeps nothing, and one who leaves partway through keeps only the portion earned. It does not undo a split that was already made without vesting, which is why it has to go in on day one.